If you’re currently shopping for a mortgage interest rate, this article should be both helpful and insightful. When you are prepared to negotiate, the rate shopping process can go a lot quicker if you know what you’re looking for. You can ensure the conditions that apply to the interest rate fit your financing needs. You can prevent the proverbial “bait & switch” where you see a great rate advertised, but then find out you are not eligible to receive that rate for one reason or another.
You may just be starting the rate race, and may not be prepared to divulge personal information to all the different mortgage professionals you speak to. In that case, you need to know about your current financial profile as well as property needs. The details you need to know before you talk rates follow:
Projected Closing Date – different interest rates have different rate hold periods. Knowing if you are closing in 30 days, or 6 months makes a difference. If you’re just looking for a pre-approval rate, be prepared for the interest rates to not be as low as the rates offered for live deals. Live deals being a purchase with an accepted offer, a mortgage refinance, or renewal.
Qualifying Income Type – You need to know your qualifying income type. Some lenders will add a premium to the interest rate if you are self-employed and “stating” your income.
Downpayment or Equity Amount – This affects whether or not your mortgage will be insured by one of Canada’s 3 mortgage default insurers. Some lenders offer lower interest rates when your mortgage is insured. This means less risk for the lender.
Property Occupancy – If the subject property is a rental, make sure you disclose that as some best rates only apply to owner occupied properties.
These are the main details you should have upfront before speaking to a mortgage professional. This ensures that preliminary rate quotes and rate information you are getting is accurate and applies to your mortgage financing needs. These are details you will require to request the type of mortgage term you’re looking for, and to receive specific rate quotes.
When we receive a call from a borrower asking for best rates, we need to determine what kind of mortgage term you’re looking for before a rate quote can be provided. If a borrower is not sure which mortgage term will fit their needs, the benefits of some different mortgage types are discussed. Then, the borrower can decide which term they prefer. Rather than discussing every term in detail, it is best to determine where the borrowers priorities lie. The followings highlights a few terms that match the most popular criteria borrowers are seeking:
Qualify For The Most
Some mortgage terms have a higher qualifying rate. This can impact the maximum mortgage amount you are approved for. A 5-year fixed term (or longer) will enable you to get a higher amount than a variable rate, home equity line of credit, or fixed term less than 5-years. The reason for this is that with a 5-year fixed term or longer, you can qualify at the contract rate you receive, rather than a higher qualifying rate. This can make a big difference. For example, all application details remaining the same, the decision between selecting a 4-year term or a 5-year term can make a difference of $74,000* in maximum mortgage amount when shopping in the $300,000- $400,000 range. That makes a large impact when you have a specific downpayment amount and you need qualify for a mortgage amount that allows you to purchase the home you desire.
If you’re budget sensitive and prefer a monthly mortgage payment that will remain consistent during your term, go with a fixed rate. A fixed rate term allows you to have a steady payment for the whole length of the mortgage term selected. The 5-year fixed rate is the most popularly advertised, but a 10-year term can give you some serious long-term payment security at only a 1% higher than it’s half-sized counterpart. If you are afraid of a long-term commitment, but still desire stability, there are fixed terms for 1-4 years as well.
Pay off Your Mortgage ASAP
A lot of closed mortgage terms offer pre-payment privileges in the 20% of the mortgage amount per year range. This can allow you to pay off your mortgage quicker. If you need a mortgage that offers more flexibility than a closed term, look into a Home Equity Line of Credit or open mortgage term. This eliminates a payout penalty and allows you to pre-pay as much as you want, whenever you want.
Looking For A Short-Term Mortgage
This is ideal if you are selling right away, or looking to flip a property. There are a couple of options available to you that may fit your needs. If you have a large downpayment, or more than 20% home equity available, a Home Equity Line of Credit (HELOC) can provide low interest. The minimum monthly payments, and an open term allow you to pre-pay at any time without penalty. If you’re looking for the flexibility of a HELOC but don’t’ have the minimum downpayment or equity required, a Variable Rate Mortgage could be your solution. It’s a closed term, but still provides low payout penalties, flexible pre-payment, and an interest rate & payment that are based on prime rate. If you want a short term and payment stability simultaneously, you can always consider a 1-4 year fixed term. These are ideal if you have a more defined timeline and can plan more specifically. The downside to these types of rates is that you need to qualify at a higher interest rate than the contract rate you’re actually receiving.
Easy Mortgage Savings
Historically variable rates have seen savings over their fixed counterparts, but only if the variable rate discount is competitive. With the best 5-year fixed rate at 2.79% today, and our best variable rate at 2.55%, Prime Rate only has to increase by 0.24% in order for the fixed rate to be more attractive. At this point in the market, you can likely save more on your mortgage by utilizing your pre-payment privileges and applying a lump sum to your mortgage principal, or increasing your monthly payments. Both will allow you to reduce your mortgage amount quicker.
You should now have a general idea of what to expect when you’re rate shopping. Of course, I want to insert the caveat that rate is not everything. There are other aspects to the mortgage process that are just as vital. Rate just so happens to be the most popular. Likely the largest purchase of your life should not be decided just on rate. Ensure you have a detailed discussion about your specific financing needs, both current and future goals with your favorite mortgage professional to ensure you’re aware of all the details of your mortgage approval before you commit to it.
*Numbers based on $70,000 qualifying income, $500/monthly minimum debt payments, $1600/year property taxes, $100/month heating, 25 year amortization. 4-year qualifying rate of 5.14% yields max mortgage amount of $271,370, 5-year qualifying rate of 2.79% yields max mortgage amount of $345,918.